The Holes in Majority Voting

Abstract

Recently, shareholder activists have successfully persuaded a number of state legislatures and the writers of the Model Business Corporation Act (MBCA) to alter their respective corporate statutes to permit changes in the voting norm for the election of directors. Instead of electing directors only by a plurality of shares, some corporate statutes were amended to permit majority voting. Regardless of one’s view about the wisdom or folly of this significant change, many legislatures have, at least for now, facilitated some form of a majority-voting system. This Article therefore examines the next generation of issues: are there holes in the statutory schemes designed to enable majority voting that undermine the victory that shareholders thought they had won?

The answer, of course, is yes. Both the corporate statutes and the fiduciary duties of directors can operate in ways that blunt the intended effects of majority voting. In order to understand how majority voting can be undermined, it is first necessary to understand the system that majority voting seeks to replace, namely, plurality voting. Under plurality voting, once a quorum is established, those candidates with the most votes win. Thus, if there is an uncontested election of directors in a plurality-voting scheme, not only are all candidates guaranteed to win regardless of how few votes they receive, but withheld votes also have no direct impact. Since this uncontested slate will normally be nominated by some or all of the existing directors, the existing directors, rather than the shareholders, effectively select the composition of the board of directors. While its undemocratic character is apparent, plurality voting exists primarily to prevent failed elections, thereby assuring that every seat on the board is filled.

Seeking to impact the selection and election of directors more directly, shareholders embarked on two different campaigns: a change in the nomination process so that shareholders can nominate board candidates (“proxy access”) and a change in the voting system to require a majority, rather than a plurality, vote. While the battle over proxy access has raged on at the federal and state levels, shareholders often have been more successful in obtaining one of two forms of heightened voting (hereinafter “majority voting”): “plurality-plus” or “true majority.” In a plurality-plus system, plurality remains the rule but candidates failing to win a majority of the votes must tender their resignations. Thus, unlike the traditional plurality system, shareholders who withhold support from candidates in a plurality-plus system can impact those election results: candidates are legally re-elected but those candidates who do not receive a majority of votes must tender their resignations. Moreover, this system spares the corporation from the negative effects of a failed election. In contrast, true majority-vote systems require candidates to get more votes in favor than withheld or against, or the candidate will not legally be elected. Like plurality-plus voting, majority-plus systems build upon true majority voting by requiring a candidate to resign upon failing to garner the requisite majority vote. Thus, by withholding their votes, shareholders can veto the candidates nominated by the board. Moreover, the existence of this shareholder veto power may cause boards to seek input from large shareholders regarding potential nominees. Since shareholders can impact directly any contested election of directors, these majority-vote systems apply only in uncontested elections.

Keeping in mind that majority voting focuses only on the election, but not the selection, of candidates, Part I of this Article delineates the numerous ways that the statutory schemes that grant majority voting can also undo or weaken that system of voting. Similarly, Part II discusses how a board’s action taken pursuant to its fiduciary duties can undermine majority voting. Part III examines those issues that will next impact the majority-voting movement. While this Article exposes the holes in majority voting, readers should consider that most boards will likely be reluctant to exploit these myriad holes. The existence of these holes, however, serves as a cautionary note to shareholders and offers a tempting array of tools for directors.